As e-commerce grows, states have become increasingly unhappy with how sales and use taxes are collected on remote retailers. A recent U.S. Supreme Court decision, South Dakota v. Wayfair Inc., however, dramatically changed the landscape for sales tax nexus, and the obligation to file and report taxes.
“It’s not Armageddon, but you may need to start filing in a handful or more states in the coming years,” says Mike Feiszli, managing director of state and local tax at BDO USA, LLP.
Smart Business spoke with Feiszli about what’s next for companies.
What’s the background on the Wayfair case?
Nearly 30 states created non-standardized statutes with economic nexus standards for sales tax. They sought to get around the nexus standard that a remote seller needs a substantial physical presence within the state to be subject to that state’s sales tax laws and reporting requirements, which the Supreme Court reaffirmed with the 1992 case, Quill v. North Dakota.
In 2016, South Dakota decided that a retailer that sells $100,000 of tangible personal property or services, or completes 200 transactions, has enough business activity to be subject to its sales tax law. The law was challenged by Wayfair and two other internet sellers in the South Dakota courts, with the lower level courts holding for Wayfair, due to the Supreme Court precedent. The Supreme Court was petitioned by the state and decided in June, 5-4, in favor of the state. It reversed Quill, finding that physical presence is an incorrect interpretation of the commerce clause and isn’t required for substantial nexus. It didn’t define what the nexus standard should be — leaving that to a stalled Congress — but it does consider South Dakota’s economic standard to be reasonable.
Have other states reacted yet?
Some states already had standards similar to South Dakota, and many of those became effective over the summer. About a dozen other laws will become effective soon. If a state had an economic nexus standard prior to Wayfair, the Supreme Court didn’t encourage retroactive enforcement. A few states, Ohio and California, for example, have higher nexus limits than South Dakota, while Pennsylvania has a nexus standard of $10,000. Many states, including Ohio, will likely start aligning more closely with South Dakota’s law.
What does this mean for businesses?
To any business owner not currently registered in multiple jurisdictions in the U.S., be aware that the landscape has changed. It’s no longer a matter of whether you have a salesperson or warehouse in a jurisdiction. If you have a certain amount of sales or transactions, states probably have, or will have soon, a law in place that will require you to register and start reporting sales and charging sales tax.
If your company believes it only has exempt sales or that because it only provides services, Wayfair won’t affect its business, that’s not necessarily the case. States will look at gross receipts that are sold into the state and expect you to register once you hit a threshold. You’ll need, at a minimum, to begin filing returns and reporting sales activity. You will also need to document exempt sales and keep exemption or resale certificates, while remembering that state’s rules vary on exemptions as well as acceptable documentation. If proper documentation isn’t kept and you’re audited, those sales could become invalidated and you as the seller may be on the hook for tax that likely should have been the purchaser’s burden.
There will certainly be a compliance cost to the court’s decision.
So, what needs to occur now? You need to do a self-analysis. States won’t immediately know you’re over because they’re not geared up for this change either — as much as they wanted this decision. However, they can and will eventually find out through audits of the purchases of your customers in their state and by cooperating with other states or governmental agencies.
Your tax adviser can help you determine the pressure points, the aggressive states, who is likely to be auditing companies soon and who is not. It’s like any business decision — go through the analysis, determine where you have issues and then decide on a plan that fits your risk tolerance and budget.
What else is important to know about the Wayfair’s long-term impact?
There are many unanswered questions, like how the decision affects international business. At some point, these cost burdens will likely be reflected in prices, and brick and mortar stores may find themselves on a more level playing field with internet businesses. As tax laws change, you’ll also want to keep an eye on whether this affects income tax or other state and local tax compliance in other jurisdictions.
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